This is something really easy to do, but can be confusing. Keep in mind SL will be run at the client and all your server needs to do is serve the package. The .xap file generated when you compile your application is nothing but a zip file. Some servers won't allow users to download content with a XAP (or unknown) extension, so an easy trick is to simply rename it to .zip.
For more information you can check this website
Tomorrow I will post about changing URLs between different webserver/deployment scenarios.